Corporate Political Donations: Investment or Agency?

published in Business and Politics 14.1 (2012)

AFA 2012 Chicago Meetings Paper

2008 WFA Meeting Paper

43 Pages Posted: 17 Mar 2008 Last revised: 5 Oct 2014

Rajesh K. Aggarwal

Northeastern University

Felix Meschke

University of Kansas - Finance Area

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: April 5, 2012

Abstract

We examine corporate donations to political candidates for federal offices in the United States from 1991 to 2004. Firms that donate have operating characteristics consistent with the existence of a free cash flow problem, and donations are negatively correlated with returns. A $10,000 increase in donations is associated with a reduction in annual excess returns of 7.4 basis points. Worse corporate governance is associated with larger donations. Even after controlling for corporate governance, donations are associated with lower returns. Donating firms engage in more acquisitions and their acquisitions have significantly lower cumulative abnormal announcement returns than non-donating firms. We find virtually no support for the hypothesis that donations represent an investment in political capital. Instead, political donations are symptomatic of agency problems within firms. Our results are particularly useful in light of the Citizens United ruling, which is likely to greatly increase the use of corporate funds for political donations.

Keywords: Corporate Governance, Political Donations, Investment, Agency

JEL Classification: G3, G34

Suggested Citation

Aggarwal, Rajesh K. and Meschke, Felix and Wang, Tracy Yue, Corporate Political Donations: Investment or Agency? (April 5, 2012). published in Business and Politics 14.1 (2012); AFA 2012 Chicago Meetings Paper; 2008 WFA Meeting Paper. Available at SSRN: https://ssrn.com/abstract=972670 or http://dx.doi.org/10.2139/ssrn.972670

Rajesh K. Aggarwal

Northeastern University ( email )

413 Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States

Felix Meschke (Contact Author)

University of Kansas - Finance Area ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
(347) 433-5495 (Phone)

HOME PAGE: http://www.business.ku.edu/faculty/meschke-felix/

Tracy Yue Wang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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